The Mystery Of The 'Five Pillar Economy'


The Pre-Election Economic and Fiscal Outlook was released today. Known as the PEFO, this is the final update from the boffins at Treasury before the election. It shows the state of Australia’s budget bottom line.

Australia continues to spend more in services than our taxation system raises. With a budget deficit of $30 billion, Australia’s public finances remain in the red and will stay in the red — despite the ongoing protestations of a balanced budget from the Labor Government — until taxes rise or spending dramatically falls.

Labor has done rather a good job at cutting expenditure in government, keeping spending roughly in line with Howard government levels. It has, however, been reluctant to raise company and personal tax. Our structural deficit continues — accompanied by an equally large deficit in the economic debate. With the Government’s economic forecasts now widely discredited, and the Opposition still unwilling to release detailed policy costings, neither major party has a quick and credible path back to surplus.

Perhaps that’s just as well. The PEFO papers also reveal that the economy is weakening. The mining investment boom is tailing off more quickly than many expected, and that’s depressing Australia’s economic performance – which in recent years has been propped up by massive investment in resource projects in the country’s north.

As in any commodities boom, it’s the usual story of supply catching up with demand, causing prices to fall. Giant resources projects, of the type that have been propping up Australia’s GDP, are at their heart speculative plays on the state of global commodities markets. When prices are high, the resources sector booms, and firms rush to green-light new mines and infrastructure. If they get the new operations online while prices stay high, they can make serious profits.

But all those new mines eventually start shipping ore to the world market, creating new supply to meet global demand. Prices fall. Firms start to lose money. They cancel projects and lay off staff. The resources sector has always been highly cyclical. Just yesterday, Australia’s largest gold miner, Newcrest, announced an eye-watering $5.8 billion loss. Newcrest has been hammered by lower gold prices and slimmer margins. 

The PEFO statement spells out clearly what that means for the broader economy:

“While the shift towards higher exports will support growth, the net contribution of the resources sector to real GDP growth will fall … A rebalancing of growth towards the non-resource sectors is needed to deliver sustained economic growth.”

The idea of “rebalancing” is not new. Economic policy-makers have been telling us for some time that as the mining boom peaks and drops away, other sectors of the economy will pick up the slack. The problem is that it doesn’t seem to be happening yet.

Housing and exports are two sectors that should be responding to current conditions in positive ways. With record low interest rates, householders should be looking to buy and developers build. The Aussie dollar falling, and exporters should be finding their products more competitive.

Both of these shifts will take to flow through the economy. In the case of housing, the risk is that low interest rates merely catalyse another spike in house prices, without encouraging the building of new homes. Housing construction employs lots of people, so an improvement here would be good for the broader economy. So far, however, it hasn’t happened. Residential construction is bumping along at levels roughly similar to 2005. This is doubly disappointing, as Australia needs new dwellings to address our chronic lack of affordable housing.

On the export side, there is some good news in the offing. After a drought-affected decade in the 2000s, rural exports are hoped to increase in coming years to meet rising demand from Asia. Education exports, largely in the form of overseas students at Australian universities, have struggled in recent years, but may be showing signs of recovery. Tourism from China is growing. A recent Reserve Bank paper on the issue argues that “Australia is well placed to supply resources to the economies of emerging Asia as they continue to urbanise and industrialise” and that rising Asian incomes will increase demand for exports of food, high-skilled manufactures and services.

If the long-term looks reasonably optimistic, the short-term is considerably rockier. The PEFO predicts the economy will continue to slow, and that unemployment will rise to 6.25 per cent. That’s before we take into account further austerity from a Labor government desperate to deliver a budget surplus, or from an incoming Coalition government committed to cutting government spending.

What the major parties actually have planned for the economy is still a live question, and not just because of the challenges we face. As Tim Colebatch points out today, we are now only 25 days from the election, and we still haven’t heard from the Opposition about its costings.

“The Coalition has barely entered the macro-economic debate, except to point to any bad numbers,” he writes. “It has outlined dozens of new spending promises and tax cuts, but few spending cuts to offset them. At different times last week it claimed these add up to $13 billion, or $15 billion or $17 billion.”

Mind you, Labor’s economic policies are in many ways just as vague. The core of the Government’s argument to be a better economic manager is that it navigated Australia successfully through the GFC. But it did so with a large fiscal stimulus; it is unclear whether a third-term Rudd government would be brave enough to again spend up big to increase economic growth. Considering the hammering it has taken for its deficit spending, you’d have to question how likely another round of stimulus would be.

What about micro-economic policies to increase productivity, or cut red tape? Again, both parties are largely talk, with little substance. The Coalition has a plan to build a “five-pillar economy”, but details on this pentagonal wonder are hard to find. How will the Coalition drive growth in one of those five pillars, education and research? Apparently, according to the Coalition’s “Our Plan” brochure, “by removing the shackles and burdens holding the industry back and by making the industry more productive and globally competitive.”

Australia’s education and research sector is heavily reliant on government investment, which doesn’t square with the Coalition’s commitment to cutting spending. When we turn to Labor’s recent record on education and research, the picture is not exactly positive either; the Government has not committed to restoring the roughly $2 billion in cuts to higher education announced earlier this year.

Productivity has been the other big refrain so far. It's important; in the long term, it’s the key factor that drives higher living standards. But both major parties’ productivity policies are pretty vague. The Coalition talks mainly about cutting red and green tape, attacking union militancy and forcing jobseekers off the dole. Rudd has a seven-point plan for a “national competitiveness agenda”, but many of the points in his plan are likely to deliver incremental gains at best. Point number one, for instance, is electricity market reform – a policy firmly controlled by the east-coast states.

All in all, we’re not hearing a lot of detail from our politicians about their economic policies. Instead, the ongoing fascination with the deficit as a proxy for economic management continues to distract from the bigger picture. In a tougher and more substantial media environment, this lack of detail would be called out, as Colebatch does today on Opposition costings. But on the whole, the media continues to obsess over trivia, like Kevin Rudd’s notes in Sunday night’s leaders’ debate, or Tony Abbott’s unfortunate turn of phrase about suppositories.

Ben Eltham is New Matilda's National Affairs Correspondent.